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Union Pacific Corporation (UNP - Analyst Report) reported second quarter 2013 adjusted earnings of $2.37 per share, surpassing the Zacks Consensus Estimate of $2.35 and year-ago earnings of $2.10. Better-than-expected earnings were aided by higher pricing and an improvement in operating ratio.

Revenues rose 5% year over year to $5,470 million in the second quarter but missed the Zacks Consensus Estimate of $5,497 million. Volumes (carloads) registered a dip of 1% year over year due to lower Agricultural and Intermodal shipments. Average revenue per car increased 5% year over year.

Operating income rose 9% year over year to $1,878 million in the second quarter. Operating expenses increased 3% year over year to $3,592 million.

Operating ratio (defined as operating expenses as a percentage of revenue) improved 130 bps year over year to 65.7%. Further, the company’s customer satisfaction index remained unchanged year over year at 93.

Segment Details

Agricultural revenues in the second quarter were $784 million, down 8% year over year. Business volumes were also down by 10% year over year and average revenue per car upped 2% year over year.

Automotive accounted for $534 million revenues, up 12% year over year. Business volumes were up 4% year over year and average revenue per car rose 8% year over year.

Chemical contributed $890 million in revenues, up 12% year over year. Volumes were up 10% year over year. Average revenue per car rose 2% year over year.

Coal revenues saw agrowth of 12% year over year to $975 million, while volumes remained flat year over year. Average revenue per car remained positive with 12% year-over-year growth.

Industrial Products generated revenues of $977 million, up 7% despite flat volumes on a year-over-year basis. Average revenue per car was up 6% year over year.

Intermodal segment revenues were $993 million, down 1% year over year. Business volumes were down 3% year over year. However, average revenue per car was up 2% year over year.

Other revenues increased 3% year over year to $317 million.

Liquidity

Union Pacific exited the second quarter with cash and cash equivalents of $1,845 million, up from $1,201 million in the year-ago quarter. Free cash flows were $833 million at the end of the quarter compared with $319 million in the corresponding prior-year quarter.

Long-term debt was $9.1 billion in the second quarter versus $8.8 billion in 2012. Adjusted debt-to-capitalization ratio increased to 39.6% from 39.1% at year-end 2012.

Our Analysis

The company expects to increase investor value and satisfy customers by concentrating on key areas like pricing, new business avenues and network efficiency improvement through enhanced safety, reliability and productivity. Further, we believe that the company has an attractive product line-up given its exposure to a unique mix of commodity end markets alongside its strength in intermodal services. Nevertheless, we stay on the sidelines due to concerns related to agricultural and coal volumes, stringent regulations, rising expenditures and competitive threats. Additionally, the export business of the company is exposed to global uncertainties.

Union Pacific, which operates with the likes of CSX Corp. (CSX - Analyst Report), Kansas City Southern (KSU - Analyst Report) and Canadian Pacific Railway (CP - Analyst Report), currently has a Zacks Rank #3 (Hold).
 

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